One ratio that precious metal traders must know about is the gold/silver ratio. This ratio shows the price of silver relative to gold. When the gold/silver ratio is high it means that silver is cheap relative to gold.

So, how do you use the gold/silver ratio?

When the ratio is higher it tells you to be on the lookout for reasons to buy silver. It means that if there is ever a reason to buy gold or silver then buying silver may prove to have a greater upside than gold. In the current market context, there is one event that could really benefit silver and that would come from the Federal Reserve.

What could the Fed do?

There is one key action that the Federal Reserve could do and that would be to signal a slower path of interest rates. The terminal rate is expected to be around 4.5-4.7% next year and after last week’s hot CPI print traders are expecting a 75bps rate hike from the Fed in early November. This is fully priced in with STIR markets pricing a 10% chance of a 100bps hike. So, the thing to watch for is any sign from the Fed that it is going to be less aggressive in hiking rates going forward than the market thinks. It could do this in one of three main ways:

  • Hike by only 50bps (remember the RBA’s action)
  • Hike by 75bps but signal lower terminal rate to come
  • Signal concerns over slowing the US economy (unlikely with the recent run of data)

Any one of these three actions or a combination of them should be supportive for silver longs. You also have to factor in the impact of inflation and real yields, but silver should snap higher on a Fed pivot as an initial reaction.